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The License of Right, Compulsory Licensing and the Value of Exclusivity

  • Rudyk, Ilja
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    This paper uses the License of Right (LOR) provision implemented in Section 23 of the German Patent Act to answer the following questions: What is the distribution of the private value of the right to exclude others provided by a patent? What are the welfare implications of having a License of Right system? Section 23 of the German Patent Act grants a patentee a 50% reduction on the annual renewal fees if he voluntarily allows anyone to use the invention only in return for reasonable compensation. We build a parametric discrete choice model of patent renewal and LOR declaration to exploit data on granted German patent applications from 1983-1988. Our estimates show that the distribution of the value of the right to exclude others is very skewed and its relative importance rises with patent age. For most patent owners the exclusion right is very valuable. Nevertheless, for a small fraction of patents a commitment to license non-exclusively may even increase the returns from patent protection. The welfare implications of the License of Right system in Germany are twofold. It increases the private value of patent rights but lowers the patent office's revenues. Furthermore, we are able to distinguish between two motives for declaring LOR, the cost-saving and the commitment motive. The fraction of declarations made out of the cost-saving motive is relatively low for young patents but increasing with patent age. In a counterfactual experiment we simulate the impact of making LOR declarations compulsory. We show that a compulsory licensing system could deprive the patent owners of a very substantial part of the incentives currently provided by the patent system.

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    File URL: http://epub.ub.uni-muenchen.de/17240/1/415.pdf
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    Paper provided by Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich in its series Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems with number 415.

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    Date of creation: Dec 2012
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    Handle: RePEc:trf:wpaper:415
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    1. Carlos J. Serrano, 2011. "Estimating the Gains from Trade in the Market for Innovation: Evidence from the Transfer of Patents," NBER Working Papers 17304, National Bureau of Economic Research, Inc.
    2. Pakes, Ariel & Pollard, David, 1989. "Simulation and the Asymptotics of Optimization Estimators," Econometrica, Econometric Society, vol. 57(5), pages 1027-57, September.
    3. Farrell, Joseph & Gallini, Nancy T., 1986. "Second-sourcing as a Commitment: Monopoly Incentives to Attract Competition," Department of Economics, Working Paper Series qt8zs1p5cc, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
    4. Ariel Pakes, 1984. "Patents as Options: Some Estimates of the Value of Holding European Patent Stocks," NBER Working Papers 1340, National Bureau of Economic Research, Inc.
    5. Suzanne Scotchmer, 1991. "Standing on the Shoulders of Giants: Cumulative Research and the Patent Law," Journal of Economic Perspectives, American Economic Association, vol. 5(1), pages 29-41, Winter.
    6. Deng, Yi, 2005. "A Dynamic Stochastic Analysis of International Patent Application and Renewal Processes," Departmental Working Papers 0515, Southern Methodist University, Department of Economics.
    7. Francesca Cornelli & Mark Schankerman, 1999. "Patent Renewals and R&D Incentives," RAND Journal of Economics, The RAND Corporation, vol. 30(2), pages 197-213, Summer.
    8. Marc Baudry & BĂ©atrice Dumont, 2009. "A Bayesian Real Option Approach to Patents and Optimal Renewal Fees," Working Papers hal-00419330, HAL.
    9. Jens Schovsbo, 2009. "Increasing access to patented inventions by post-grant measures," Science and Public Policy, Oxford University Press, vol. 36(8), pages 609-618, October.
    10. Deng, Yi, 2011. "A dynamic stochastic analysis of international patent application and renewal processes," International Journal of Industrial Organization, Elsevier, vol. 29(6), pages 766-777.
    11. McFadden, Daniel, 1989. "A Method of Simulated Moments for Estimation of Discrete Response Models without Numerical Integration," Econometrica, Econometric Society, vol. 57(5), pages 995-1026, September.
    12. Andrea Shepard, 1987. "Licensing to Enhance Demand for New Technologies," RAND Journal of Economics, The RAND Corporation, vol. 18(3), pages 360-368, Autumn.
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